Questor share tip: Lookers profit motors ahead

Lookers is benefiting from a strong car market. Questor says buy.

Car sales in the UK are holding up remarkably well, given the economic backdrop. In fact, things are going so well that car dealer Lookers has just posted its fourth consecutive year of record profits.

Lookers operates 121 car franchise dealerships, selling new and used cars. However, it is the sales of spare parts for vehicles already on the road that generate 60pc of profit.

Because the economic situation on mainland Europe is so dire, struggling Continental car makers have been giving good deals in the UK in terms of price and financing options. European car sales slumped to a 17-year low in 2012, with only Britain bucking the trend with 5.3pc growth. Last year, UK car sales came in at 2.06m, although this was 15pc below the peak sales seen in 2007.

Lookers’ new and used car sales grew 12pc over the year, which was ahead of the wider market. Management believes Lookers outperformed the market because of a strong focus on proactive pricing, stock management, improved buying and further focus on the effectiveness of the group’s website.

Sales of spare parts rose a more modest 2.8pc. Despite the UK car market being more buoyant, consumers are delaying non-essential repairs as they try to save cash. However, sales of older vehicles have been increasing, which makes sense if people are delaying non-essential purchases. The mean margins at the operation dipped slightly to 40pc from 42pc.

In the year to December, turnover rose 8.3pc to £2.06bn, with pre-tax profits up 12.4pc to £35.3m. The total dividend for the year was increased by 8pc to 2.35p. The final payment of 1.55p will be made on June 4.

The new year has also started well, with UK new car sales rising for the 12th consecutive month in February, according to data from the Society of Motor Manufacturers and Traders, which was also released yesterday.

There were 66,749 new registrations in February, a 7.9pc rise on the same month last year. This is despite February usually being a quiet month because it is just ahead of the vehicle registration plate changes, which happen each March.

The shares are trading on a 2013 earnings multiple of 11.8, falling to 10.7. The prospective yield is 2.9pc, rising to 3.1. The strength in Lookers’ end markets and the fact that management plan to target acquisitions at the luxury end of the market, mean that Questor is inclined to keep a buy, despite recent gains. However, any new investors may wish to wait for a pull-back.